Toys R Us to Pay $1.3 Million Penalty for Violating FTC Order

Toys “R” Us, Inc. has agreed to pay a $1.3 million civil penalty to settle Federal Trade Commission charges that it violated a 1998 order governing its dealings with its suppliers. The order prohibits Toys “R” Us from urging any supplier to limit supply of products or refuse to sell to discounters. It also bars Toys “R” Us from asking any supplier about its sales to any toy discounter, and requires the company to preserve and maintain records of communications with its suppliers related to its sales and distribution.

The civil penalty announced today comes in response to FTC allegations that between 1999 and 2010, in violation of the 1998 order, Toys “R” Us, through its Babies “R” Us subsidiary, complained to several of its suppliers about the discounts other retailers were providing to consumers, requested information from several of the companies about how they were supplying products to discounters, and failed to keep records of communications with its suppliers.

The alleged practices were prohibited by the 1998 order, which was issued after the FTC found that Toys “R” Us had used its dominant position as a toy distributor to extract agreements from and among toy manufacturers to stop selling the same toys to warehouse clubs. The 1998 order was affirmed by the Seventh Circuit Court of Appeals for the United States.

“This case reaffirms the importance of complying with all aspects of a Commission order,” said Richard A. Feinstein, Director of the Bureau of Competition. “Although we did not find evidence that Toys ‘R’ Us entered into agreements with the suppliers that violated the order, the penalty here underscores the importance of parties complying fully with all of their order obligations.”

In the complaint filed today, the FTC alleges that Toys “R” Us violated the order by complaining to a number of manufacturers about discounting of their baby products at various times between 1999 and 2010, and that these complaints could lead those suppliers to limit supply or refuse to sell their products to toy discounters.

Second, the FTC complaint alleges that at various times between 2000 and 2010, Toys “R” Us requested information from a number of manufacturers about their supply of products to toy discounters, in violation of the 1998 order.

Finally, the FTC alleges that after the order became final, Toys “R” Us did not adopt any specific program or procedure to assure compliance with the requirement that it maintain all records and communications with suppliers related to any aspect of toy sales or distribution. In fact, Toys “R” Us’s practice from December 1998 until at least May 2010 was to delete the email files of employees who left the company, including those it was required under the order to keep, according to the complaint.

The Underlying Case Against Toys “R” Us in 1998

In its administrative complaint issued in May 1996, the FTC charged Toys “R” Us, the nation’s largest toy retailer at the time, with using its power to keep toy prices higher and reduce toy outlet choices for consumers. The FTC alleged that Toys “R” Us extracted agreements from toy manufacturers to stop selling certain toys to warehouse clubs, or to put the toys into more expensive combination packages, so consumers could not obtain lower-priced toys from the clubs or compare prices easily.

In issuing its final decision and order in October 1998, the FTC upheld the initial decision of an Administrative Law Judge who found that Toys “R” Us had used its dominant position as a toy distributor to extract agreements from and among toy manufacturers to stop selling the same toys that they sold to warehouse clubs, such as Costco. The FTC opinion stated that Toys “R” Us wanted to prevent consumers from comparing the price and quality of products in the warehouse clubs to the price and quality of toys displayed in its stores, thereby reducing the effectiveness of the clubs as competitors. Toys “R” Us appealed the Commission Decision and Order to the Seventh Circuit Court of Appeals, where the Commission prevailed. The Commission’s order became final on December 18, 1998, and Toys “R” Us’s appeal was denied on August 1, 2000.

The Commission vote approving the complaint and consent judgment settling the court action was 5-0. Copies of the complaint and judgment can be found on the FTC’s website and as a link to this press release. The FTC filed the documents in the U.S. District Court for the District of Columbia on March 29, 2011.

The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.

(FTC File No. 0910082; D09278)
(Toys R Us.final)